National Institute of Economic and Social Research

Friday, 19 October 2012

"We've got the deficit down by a quarter": an update

Figures for the public finances vary a lot from month to month, partly predictably, partly not; and they're invariably revised, often by quite large amounts. Hence, I've resisted updating this July post, which explains that while the government's repeated claims that "we've got the deficit down by a quarter" are true if you compare 2011-12 with 2009-10, this was mostly achieved simply by cutting public investment. But now seems a good time to do so, since today's public finance figures mark the half way point of the financial year, and - in contrast to recent months - the figures are not nearly as bad as expected, with revisions meaning that the first half of the year now looks significantly better.Nevertheless, there still isn't really much point in looking at month to month numbers; but the big picture is clear. Here's the total deficit (public sector net borrowing, excluding the purely financial transactions that distorted public investment in April 2012) and the deficit on the current budget, calculated on a rolling 12-month basis to eliminate seasonality as far as possible.

Bottom line: the total deficit (the red line) has come down (by about a fifth in the year to September 2012, compared to the peak in the year to March 2010. As a percentage of GDP the reduction would be somewhat more). But that was overwhelmingly achieved by cutting public investment. Over the same period, investment was cut in half, more or less. By contrast, as the blue line in the chart shows, the current deficit fell by less than a tenth, and indeed has been rising slightly for more than a year now. So the conclusions of my earlier post, which I reproduce here, remain valid: Of course, not all this is the government's fault. The previous government also planned to slash investment spending. Obviously the broader economic backdrop is much less favourable than was hoped in June 2010 - although this is not some unlucky coincidence for which the government has no responsibility. I and many others would argue it is to a very large extent precisely because of the misguided policies of premature fiscal consolidation implemented not only by the UK government but those making policy in the eurozone. So here's an alternative, and more accurate, text for the Prime Minister:

"We've reduced the deficit by a quarter, in line with the plans we inherited, despite the fact that the misguided policies we and others implemented have made deficit reduction much more difficult. We've done this mostly by massive cuts to public investment, despite the fact that the economic circumstances are more conducive to public investment than at any time in living memory. On the bright side, however, we've learned that during a period of prolonged weak or zero growth, with businesses and households seeking to raise saving and lower investment, it is possible to continue to finance very large deficits at very low interest rates. "